Office demand to bounce back in 2022 but "missing puzzle piece" is workers
Australian office markets have passed the worst of the downturn. Photo: iStock

Demand for office space to bounce back in 2022: Property Council

The demand for office space in Australia is expected to bounce back this year, with Sydney leading the charge, the latest Property Council of Australia’s Office Market Report has revealed.

While Melbourne and Brisbane have both had rises in their office vacancy rates to 11.9 per cent and 15.4 per cent, respectively, they’re predicted to fall later in 2022, at the same time as Sydney is experiencing a very respectable 9.3 per cent. Meanwhile, Hobart and Canberra have vacancy rates lower than historical averages.

“Contrary to many predictions, the office is not dead; it’s in even more demand than previous reports,” said Property Council NSW executive director Luke Achterstraat at the release of the report on Thursday. “The missing piece of the puzzle now is the return of office workers who are critical to the revitalisation of CBDs.

“It is critical for the livelihood of our CBDs that office workers are allowed to, and encouraged to, rediscover the energy and joys of working in our cities and with colleagues.”

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Luke Acherstraat, the Property Council NSW executive director, speaking at an industry event on Thursday.

The report found that the COVID-19 pandemic had spurred a flight to quality with premium-grade office stock in Sydney having a vacancy rate now of just 4.9 per cent, with 33,555 square metres of additional space coming online over the past year and 20,477 square metres of withdrawals, often for upgrades. In addition, another 178,760 of new stock is due to enter the Sydney market over 2022.

“There had been a lot of predictions of doom and gloom, but there’s been a big turnaround,” Adrian Harrington, head of wholesale investor relations and fundraising at Charter Hall, told the launch event. “Some people are still a bit pessimistic, but the amount of capital we are talking to who are looking to invest in Sydney and Melbourne in the next 12 months is very encouraging.

“I think that is very positive. We’ve also got a lot of tenants looking to come into the market and, together with a market recovery, with a 4.5 per cent growth figure forecast for this year, all the signs are that 2022 is going to be much better than 2021. It’s going to be an exciting time for our cities.”

Deborah Coakley, executive general manager funds management Dexus, appearing on Zoom at the meeting, agreed that things were looking up and that people were now keen to return to their offices to work. “Sydney’s strong sentiment is to return to CBDs and some sense of normality,” she said. “I think we’ll see strong economic growth this year and continued economic growth.”

However, for those workers to come back, there is a need for safe workplaces, with good ventilation, social distancing, and innovations like touchless controls, says Charlie Peck, development director of Brookfield Properties. His company will all be back in the office from Monday.

Yet merely being able to open windows in offices won’t suffice, Professor Lidia Morawska, director of the International Laboratory for Air Quality and Health, told the gathering in a virtual address. In Australian cities, there’s often too much heat outside, as well as noise.

“So, it’s about making sure there’s good ventilation in offices,” she said. “Creating safe conditions is important insurance for staff … We know viruses are here to say as we’ve all had colds and flu infections for a long time. But in the future, we should be better off because of good ventilation.

“Innovation will mean it won’t entail as much energy consumption and, with flexible working arrangements meaning offices won’t be as full, it will take less energy to ventilate rooms.”

Alexa Mahony, director of office leasing Knight Frank Australia, told the event, “It’s definitely a super-positive story.”

Her colleague, Andrea Roberts, Knight Frank national head of leasing, said a great sign was all the pent-up demand of the last few years of accumulated workplace decisions being put on hold or delayed through 2020 and 2121. “Companies are valuing office space, especially new and premium buildings, as they need to bring their teams back together with an improved quality and amenity offering for their workplaces,” she said.

Colliers released its Office Market Outlook at the same time as the Property Council and also struck positive notes. National director office leasing Cameron Williams said that the Sydney CBD office market had shown strong resilience, despite the pandemic. The vacancy rate could increase slightly in the second half of the year, with the completion of Quay Quarter Tower and Salesforce Tower, but he feels they’ll also stir up more interest.

“The prime market in Sydney, particularly in the core of the CBD, is highly sought as a flight to quality trend continues to play out,” he said. “The Sydney CBD premium market is dominated by interest from private equity groups, legal and professional services.

“Tenants are looking to trade up in terms of both building quality and location. They want to attract talent back into the office and premises that inspiring with great amenity are in hot demand.”

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The Property Council's latest office report found the pandemic prompted a flight to quality.

Although Melbourne’s vacancy rate is higher at 11.9 per cent, that could well be the peak of the current cycle before a steady decline as 2022 unfolds, forecasts Colliers’ Andrew Beasley, fellow national director, office leasing in Melbourne.

“We saw some solid leasing activity within the last three months of 2021 and expect that demand will return after most Melburnians have returned to work after having most of January off,” Mr Beasley said. “The Melbourne CBD should see some solid activity this year.”

On the other hand, Brisbane may yet to see its peak that could be almost up to 16 per cent, but there’s also been a flurry of activity. Together with the upcoming 2032 Olympics, “We have no doubt that the CBD is on the road to returning to its former glory,” Colliers’ Matt Kearney, national director, office leasing, said.

Agency CBRE is also optimistic, believing Melbourne has been slower to recover because of the extended lockdowns but attesting to plenty of pent-up demand sitting ready to spur the back-to-work momentum.

“Australia’s national office market continued to recover through the second half of 2021, with strong tenant enquiry and transactional activity recorded in most major cities,” said Mark Curtain, CBRE head of office leasing, Pacific. “Despite Sydney and Melbourne being in lockdown for more than 50 per cent of this period, tenants around the country pressed on, implementing their long-term office accommodation strategies.

“Net absorption across Australia for the full year improved significantly, recovering all of the ground lost in 2020 and then some. Most markets have now passed the worst of the downturn, and we expect the recovery story of the Australian office market to continue in 2022.”

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